Lawrence G. McMillan reviews MachoBacho's position.
The Play: Long Call - Play #1
This post best suited for: All levels
Outlook: Bullish
Who should run this play: Veterans and higher
Trader: MachoBacho
Trade Setup:
For this play, we want to score sooner than later, but it need not be immediate. Something along the lines of a touchdown in the first quarter (3 months) would be great. Since the calls don't expire until September, it's okay if we don't get in the end zone on the first drive, but the end of the first half would be too late.
Trade Status: Open; entry data
Trade Recap:
IMAX = 6.86 as of 4/8/08 close
3/27 Trade 1: Bought to open 1 IMAX Sept 5 call @ 2.60 IMAX = 7.18 as of 3/27 close
4/2 Trade 2: Bought to open 1 IMAX Sept 5 call @ 2.35 IMAX = 7.01 as of 4/2 close
Long 2 IMAX Sept 5 calls with average cost basis of 2.48
Current market 2.25 - 2.45 as of 4/8 close
Trade Result: - 9% unrealized; marked on the bid; $0.23 loss per contract
Trade Duration: 13 days as of 4/8 close
Trade Note:
"I still hold high hopes for IMAX and believe it is no Sirius-like flim-flam. To the contrary, it is expanding and near to accurate in 3D renditions, as I could see at the "Hannah Montana and Mylie Cyrus" concert that I was so honored to attend with my daughter. What "I" like on the screen won't count -- truthfully, I don't feel that good 3D can make up for general average cinematography and high prices. But this Hannah Montana and Mylie Cyrus come across as very whole, young and talented young ladies, just the kind of qualities you'd like to see in your daughters of that age. Nothing slinky, sultry, or appealing to the prurient, this deserves full attendance numbers. Like usual, though, we went to a matinee -- I hate large crowds at theatres. We had plenty of room to sit down together and enjoy it. I heard the evening performances were overflowing, in many places. Well, I'm usually in bed by that time. You see, I like read Poor Richard's Almanac, War and Peace, things like that.
The long and short of my question is, did anybody see the late night crowds at Hannah Montana / Mylie Cyrus that might show how well IMAX was being received? That, together with the numerous contracts it is signing up, modes well for it's future, as long as the management turns out to be planning to reward shareholders and not just increase their stock options or dilution the holding of current shareholders in a never-ending bid (like Sirius) to shore up an idea whose time has come and passed already. Personally, I feel Sirius is too late to catch the wind, and that IMAX's sails are just getting full and it has a lot of potential for PROFITS NOW!!
That's why I like Imax call options. Now, that being said, IMQ IA is not the most aggressive of positions. I'm basically buying in like it was some kind of glorified margin account going under the name call options -- preferring already ITM options. - MachoBacho long call entry
Next Earnings Announcement: 6/13/08 unconfirmed
Rookie's Corner:
A long call gives you the right to buy the underlying shares at Strike Price A (5). Calls may be used as an alternative to buying the stock. You can profit if the shares rise, while limiting the risk that could result from purchasing the stock. It is also possible to gain leverage over a greater number of shares because calls are usually considerably less expensive than the stock itself. But be careful, especially with short-term out-of-the-money calls. If you buy too many option contracts, you are actually increasing your risk. Options may expire worthless and you can lose your entire investment, whereas if you own the stock it will usually still be worth something.
Break-even at Expiration:
Strike A plus the cost of the call. (5.00 + 2.48 = 7.48)
The Sweet Spot:
The stock goes through the roof.
Maximum Potential Profit:
There's a theoretically unlimited profit potential, if the stock goes to infinity.
Maximum Potential Loss:
Risk is limited to the premium paid for the call option.
Margin Requirement:
After the trade is paid for, no additional margin is required.
As Time Goes By:
For this play, time decay is the enemy. It will negatively affect the value of the option you bought.
Implied Volatility:
After the play is established, increasing implied volatility is your friend. It will increase the value of the option you bought. It also reflects an increased possibility of a price swing (without regard for direction).
MachoBacho,
Obviously you have a lot of reasons why you like IMAX. I have no position in that stock and no opinion on the stock itself, but I can offer some commentary - both from an option buyer's point of view and from the point of view of someone who's been trading professionally for over 30 years.
a) options vs. stock?
In my opinion, if you have a long-term opinion on a stock - such as is the case here - then you should buy long-term options to act upon that opinion. In fact, it is even acceptable to buy slightly out-of-the-money options if they are long-term (LEAPS) options, because those will have a delta of nearly 0.50 even though they are out of the money.
I think that's what you were trying to do, for you bought the longest-term options available. And that's exactly the proper thing to do in a situation like this. However, September options were the longest-term options available. Furthermore, it looks to me like IMAX options are slowly being delisted, since there are no December (2008) contracts being traded.
For that reason, and also because the stock is so low-priced, perhaps the better approach is to buy the stock itself. The concept of a "perpetual option" has never been exactly realized, but many traders view a low-priced stock as just that - a cheap way to take a long-term position where they like the fundamentals. Of course, if your entire exposure was just going to be 2 calls, that doesn't even equate to the cost of 100 shares of stock. But if you decide to take a larger sized position, then you might want to consider buying the stock instead of intermediate-term September calls.
Click here for a larger image.
b) "story" stocks:
Every stock has a story - whether it's a fundamental or a technical one. Fundamental stories always sound compelling, but when you get right down to it, you need to ask yourself if the story is a reasonable one. I'll relate an old experience of mine that serves to illustrate this purpose. Back in the early 1970's, Walt Disney Corp. decided to re-release some of the treasured animated movies. Prior to that, they had not brought these movies back to the theaters. Of course, the audience response was good. Shortly thereafter, my neighbor, who was a nuclear physicist (i.e., an intelligent guy), concluded that this was going to be such a boon for Disney that he had to buy the stock. That was in late 1972 or early 1973 - right at the top of that bull market and just before one of the nastiest bear markets (1973-1974). Needless to say, DIS stock got clobbered. The point is: do you think that his reasoning was unique? Do you think that every other analyst, movie goer, parent, and just general market participant realized that bringing those movies back was gong to generate revenue? Of course they did. So, his analysis was a waste. The market already knew those facts and had already discounted them into the stock price.
Now, I have no idea if IMAX is like that DIS example or not. Are the contracts that you mention real and, if so, does everyone already know about them? If not, then maybe you are onto something. But if it's "news" that the marketplace already knows about, then there is no "edge" in this trade.
Thanks for your trade comments and best of luck in your position.
President
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This comment and any market data included here were prepared on 4/08/08.
Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options.
While Delta represents the consensus of the marketplace as to the theoretical price movement of the option relative to the underlying security there is no guarantee that this forecast will be correct.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Lawrence G. McMillan has a professional business relationship with TradeKing.
